ETF Traders Piling On The Risk After QE3

By Brendan Conway

You see it in major stock indexes, and you see it in exchange-traded fund flows: Investors trust the Federal Reserve.

ETFs to track large-cap, small-cap, and mid-cap stocks, high-yield bonds, Brazilian and European stocks, and banks are big asset gatherers over the last week, reflecting traders’ bets that the third round of quantitative easing will, at minimum, keep a floor under “risk” assets.

The SPDR S&P 500 ETF (SPY) has vacuumed up $5.2 billion, according to XTF.com. Second in line is the smallcap iShares Russell 2000 Index Fund (IWM). Money managers often use these broad, heavily traded ETFs as placeholders when they don’t want to miss out. (That is, when they’re chasing the market!)

Third in line in is Vanguard Emerging Markets (VWO), gathering $1.5 billion in a week, followed by rival iShares MSCI Emerging Markets Index Fund (EEM), at $878 million.

Rounding out spots five through seven are “risk” and “currency debasement” plays: The iShares MSCI Brazil (EWZ), the Financial Select Sector SPDR Fund (XLF), and the SPDR Gold Trust (GLD).

Meanwhile, the big, staid bond funds that were commonly atop ETF flows all year have fallen well behind. The same is true for volatility-trading and hedging products such as the Barclays iPath S&P 500 VIX Short-Term Futures ETN (VXX).

About Focus on Funds

As exchange-traded funds and other investing vehicles have ballooned in number, the task of figuring out what works well and what doesn’t has only gotten harder. Barrons.com’s Focus on Funds looks under the hood of ETFs, mutual funds and hedge funds for overlooked values, actionable ideas and the latest pitfalls for fund investors.

Chris Dieterich has covered the U.S. stock market for The Wall Street Journal and Dow Jones Newswires. He is a graduate of Regis University and the Missouri School of Journalism.